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training_data/curated/text/686a661f2ab5316e72bc1c218f450241940e68f373540cef709473e509a05300.txt

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+Cl,apter 32: Structured Produds 631 
+To remain neutral, one would have to keep computing the deltas of the options, 
+both listed and imbedded, as time passes, because stock movements or the passage 
+of time could change the deltas and therefore affect the neutrality of the position. 
+HEDGING PERCS WITH COMMON STOCK 
+Some traders may want to use the common stock to hedge the purchase of PERCS. 
+These would normally be market-makers or block traders who acquire the PERCS in 
+order to provide liquid markets or because they think they are slightly mispriced. The 
+simplest way for these traders to hedge their long PERCS would be with common 
+stock. 
+This strategy might also apply to an individual who holds PERCS, if he wants to 
+hedge them from a potential price decline but does not actually want to sell them (for 
+tax reasons, perhaps). 
+In either case, it is not correct to sell 100 shares of common against each 100 
+shares of PERCS owned. That is not a true hedge. In fact, what one accomplishes by 
+doing that is to create a naked call option. A PERCS is a covered write; if one sells 
+100 shares of common stock from a covered write, he is left with a naked call. This 
+could cause large losses if the common rallies. 
+Rather, the proper way to hedge the PERCS with common stock is to calculate 
+the equivalent stock position of the PERC S and hedge with the calculated amount of 
+common stock. The example showed how to calculate the ESP of the PERCS: One 
+must calculate the delta of the imbedded call option, which may be a long-term one. 
+Then the delta of the PERCS can be computed, and the equivalent stock position can 
+be determined. 
+Example: V sing the same prices from the previous example, one can see how much 
+stock he would have to sell in order to properly hedge his PERCS holding of 1,000 
+shares. 
+Assume XYZ is trading at 33, and the PE RCS has two years until maturity. If the 
+PERCS is redeemable at 39 at maturity, one can determine that the delta of the 
+imbedded option is 0.30 (see previous example). Then: 
+Delta of PE RCS = 1 - Delta of imbedded call 
+= 1- 0.30 
+= 0.70 
+Hence, the equivalent stock position of 1,000 PERCS is 700 shares (1,000 x 
+0.10). 1 Consequently, one would sell short 700 shares of XYZ common in order to 
+hedge this long holding of 1,000 PERCS.